Restricting Multiplication of the small business limit

2016 Federal budget announced measures to reduce a Canadian controlled private corporation’s accessibility to the small business limit by restricting multiplication of the small business limit. The announcement introduced the term specified corporate income (SCI) – defined as income earned through the provision of services or property to another corporation where there is common ownership.

Let’s say that there are two unassociated corporations: OpCo and ServiceCo. OpCo pays ServiceCo a management fee for management services provided.

Previously OpCo and ServiceCo were each entitled to claim the $500,000 small business limit and, consequently, each corporation would pay 13% tax in British Columbia (federal and provincial combined) on its first $500,000 of qualifying income.

Effective for taxation years beginning on or after March 22, 2016, if there is common ownership between OpCo and ServiceCo, then SerivceCo cannot claim the small business limit on the active business income earned from OpCo unless OpCo assigns a portion of its unused small business limit to ServiceCo. This assignment is done by completing “a special form” – which has not yet been released.

Common ownership exists when ownership interest in Opco is held by:

ServiceCo;

any shareholder of ServiceCo.

any person who does not deal at arm’s length with any shareholders of Service Co.

However, if 90% or more of ServiceCo’s active business income is earned from providing services to arm’s length persons other than OpCo, then these SCI rules do not apply.

If Opco does not assign any of its small business limit to ServiceCo, ServiceCo will pay tax 26% tax – rather than 13% tax – in British Columbia (federal and provincial tax combined).

As at the date of the post, this 2016 Federal budget initiative had not yet received Royal Assent.